Governments’ spending on fuel subsidies benefit the rich more than the poor – says World Bank Report

Economic growth in Sub-Saharan Africa remains strong and is poised for lift-off after growing at 4.9 percent in 2011, just shy of the pre-crisis average of 5 percent.

But the region remains vulnerable, with drought in the Sahel and high governments spending on fuel subsidies that consume 1.4 percent of GDP, which mostly benefit the rich.

Excluding South Africa, which accounts for over a third of the region’s GDP, growth in the rest of the region was 5.9 percent, making it one of the fastest growing developing regions, according to a new World Bank report on Africa’s economy.

Over a third of countries in the region attained growth rates of at least 6 percent, with another 40 percent growing between 4 – 6 percent.

Among the fast growing economies in 2011 were resource-rich countries such as Ghana, Mozambique, and Nigeria, as well as Rwanda and Ethiopia – all posting growth rates of at least 7 percent in 2011.

“In view of the turbulence that has beset the global economy in the last five years, many would be right to think that the prospects for Africa are terrible. But as this issue of Africa’s Pulse shows, African economies continue to show resilience and some of the fastest-growing economies in the world are now in Africa,” says Obiageli ‘Oby’ Ezekwesili – the World Bank’s Vice President for Africa, and a former Nigerian Minister of Mineral Resources.

Ms. Ezekwesili also said that; “The urgent agenda remains sustaining the macroeconomic reforms, while accelerating the structural reforms that will deliver the right quality of growth that creates jobs and raises incomes on the continent.”

However, the new report ‘Africa’s Pulse’, which is a twice-yearly analysis of the issues shaping Africa’s economic prospects, also says that theEuro zone debt crisis and tighter domestic policies in some large developing countries pushed African exports lower in late 2011.

Metal and mineral exporters, such as Zambia, Niger, and Mozambique; and cotton exporters – Benin and Burkina Faso, were among the hardest hit in the three months ending in November 2011.

Given the recent strengthening of other commodity prices in 2012, export values for both agriculture and metal and mineral exporters may already have started expanding.

Tourism slows but private investment up

The latest Africa’s Pulse report mentions that the weakening global economy in the second half of 2011 affected the arrival of tourists in the continent.

For the year, tourist arrivals in Sub-Saharan Africa were up by 6.2 percent, higher than the global average of 4.4 percent, but lower than the 9.6 percent recorded for the region in 2010, when it benefitted from hosting of the World Cup. Tourist arrivals from Europe, saw a decline in major destination markets such as Mauritius.

In a significant development, the World Bank says that overall capital flows to Sub-Saharan Africa rose by $8 billion in 2011 to $48.2 billion. Foreign direct investment, which accounts for about 77 percent of all capital flows to the region, contributed to about 83 percent of the increase.

The region is increasingly being recognized as an investment destination, including private equity investments.

Food insecurity still a worry

Africa’s Pulse reports that the Sahel region of West Africa is facing a severe food security situation. Less than average rainfall, poor distribution, and displaced families – due to conflict, have left more than 13-15 million people across Niger, Mali, Burkina Faso, Chad and Mauritania vulnerable.

A below average and patchy rainfall in 2011, led to a smaller grain harvest for the 2011/2012 season and less grain production across the Sahel – in particular in Mauritania, Chad, Niger and the Gambia.

Total grain production in the Sahel is at least 25 percent below the previous season (2010/2011), with Chad and Mauritania recording shortfalls of at least 50 percent, compared to last year.

There are concerns the food crisis could spread to Senegal and northern parts of Nigeria and Cameroon.

Returning emigrants from North Africa and reduced remittances from migrant workers have deepened the effects of the crisis.

The current conflict in Mali has also forced thousands to flee their homes to safety in Burkina Faso and Mauritania, putting pressure on food markets and increasing the strain on already vulnerable communities.

“The famine in the Horn of Africa last year and the drought in the Sahel this year are cruel reminders that Africa, the continent that contributed the least to greenhouse gas emissions, is likely to be the most hurt by climate change,” says the World Bank’s Oby Ezekwesili.

Fuel subsidies benefit the rich more than the poor

The new Africa’s Pulse also examines governments spending on fuel subsidies in Africa. It reports that in 2010-11 over half of all African countries had subsidy spending programme in place for fuel products, costing an average 1.4 percent of GDP.

Of the 25 countries with fuel subsidies, the fiscal cost in six countries, – primarily oil exporters, was at or above 2 percent of GDP in 2011.

The fiscal cost to oil exporters was almost two-and-a-half times the levels observed for oil importers. These costs have grown sharply in some countries in recent years.

However, fuel subsidies overwhelmingly benefit better-off families, with survey results for 12 countries worldwide showing that the top 20 percent of households receive about 6 times more in subsidy benefits than the bottom 20 percent.

As world oil prices remain high, a number of African countries have raised domestic prices of fuel.

Ghana raised fuel prices by 30 percent in January 2011. Similarly, Mozambique raised fuel prices in 2011 (10 percent in April and 8 percent in July) and Guinea also introduced measures to reduce the fuel subsidy.

On January 1, 2012, the Nigerian government removed the fuel subsidy on gasoline. Following week-long protests, a portion of the subsidy was reinstated.

“That poor people protest the removal of fuel subsidies that benefit the rich shows how deep the continent’s governance problems are. They simply don’t trust the government to spend the savings on them,” says Shanta Devarajan – the World Bank’s Chief Economist for Africa and author of Africa’s Pulse.

As Africa’s Pulse notes, rolling back fuel subsidies is a politically sensitive issue.

Removing subsidies and raising prices needs to be well managed. Social assistance programs need to be strengthened so as to help poor and vulnerable households weather the price shock.

Another is to increase public understanding and support for subsidy reform, by having a transparent and evidence-based discussion and scrutiny of subsidies: the full cost of the subsidy, the distribution of the subsidy and who is benefiting from the subsidy, and the implications for public spending on priority areas.

While the Report shows that Africa’s economic growth prospect looks promising, there are serious fault lines that may open up into deeper cracks, which may well plunge the continent into economic stagnation or worse – contraction.

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